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Public companies are required to inform the market of material changes in their affairs. Issuers listed on the Toronto Stock Exchange (TSX) or the TSX Venture Exchange must also disclose material facts that have a bearing on their business. Determining when a material change has occurred or when the time has come to disclose a material fact can involve difficult judgments by management.

Earlier in 2008, the Ontario Securities Commission (OSC) provided guidance on when the fact of contractual negotiations becomes a material change, in the matter of AiT Advanced Information Technologies Corporation. We commented on the AiT’s enforcement proceedings in an earlier issue; in another article on our website we comment on the most recent chapter in those proceedings.

Recently, the OSC considered whether a mining company should have publicly disclosed that it was experiencing difficulties with a government authority in relation to its mineral tenure.

The Facts

Rex Diamond Mining Corporation (Rex) was listed and trading on the TSX until October 2006. It has mining operations located in Paraguay and a number of African countries, including Sierra Leone.

During the period from January to June 2003, Rex received a series of three warning letters from a department of the Sierra Leone government, which advised that two mining leases relating to its diamond mining operations in Sierra Leone might be cancelled because Rex had not complied with the conditions set out in the leases.

During that period and through November 2003, Rex made its required periodic Management’s Discussion and Analysis and Annual Information Form filings, but made no reference to the possibility that the leases were in danger of being cancelled.

On December 15, 2003, Rex became aware of a notice of tender that announced that the Sierra Leone government was seeking tenders with respect to certain mining rights previously held by Rex pursuant to one of the leases.

On February 19, 2004, Market Regulation Services (RS) contacted Rex upon identifying fluctuations in Rex’s share price. Counsel for Rex advised RS that he was aware only of a pending private placement, and that he had verified with Rex that there were no other corporate developments.

On March 30, 2004, the Sierra Leone government issued a tender evaluation declaring that a third party had been granted mining rights in an area covered by one of Rex’s leases ― and stated that Rex’s leases had been cancelled in October 2003. Three days later, Rex issued a news release acknowledging that Rex had learned its leases had been cancelled, but did not file a material change report.

In October 2004, RS requested Rex to provide a chronology of events leading up to the news release, and to state when Rex had first become aware that its leases had been cancelled. Rex provided RS with an incomplete chronology that was inconsistent with certain documents, and failed to disclose certain correspondence. RS was ultimately left with the impression that Rex had not become aware of the cancellation of the leases until January 30, 2004. During the subsequent OSC staff investigation, Rex explained its failure to disclose to RS on the basis that since negotiations with the Sierra Leone government were ongoing, that information was not material and did not require disclosure.

The OSC’s Decision

The OSC found that a material change in the business, operations or capital of Rex likely occurred when Rex received each of the first and second warning letters. It found that material changes certainly did occur in the business, operations or capital of Rex when Rex received the final warning letter, when Rex became aware of the notice of tender of certain of its mining rights, and when the Sierra Leone government issued the tender evaluation.

The OSC held that Rex should have issued news releases and filed material change reports following the receipt of each of the warning letters. By failing to do so, Rex breached the disclosure requirements in Section 75 of the Securities Act (Ontario) and acted contrary to the public interest. The OSC also found that Rex had acted contrary to the public interest by providing inaccurate and incomplete disclosure regarding its operations in Sierra Leone in a number of its public filings throughout 2003, and by providing RS with an inaccurate and incomplete chronology of events.

McCarthy Tétrault Notes:

The OSC emphasized the following points in its decision:

A determination of materiality is not always straightforward and there is no "simple bright-line standard or test." The assessment of whether a material change has occurred is a fact-specific exercise.

The test for materiality is objective and is one of market impact. An investor wants to know the facts that would reasonably be expected to significantly affect the market price or value of securities.

Abnormal fluctuations in share prices, volume and the number of trades per day demonstrate market impact, and indicate that the market is reacting to something.

The concept of material change requires an exercise of judgment. Best disclosure practices dictate that when in doubt, an issuer should consider the information to be material and err on the side of public disclosure.

The value of mining assets is highly relevant in a material change determination. In the mining industry, mineral properties are constantly being assessed to determine whether there is a change in the characterization of the property. From the point of view of investors, new information relating to a mining property bears significantly on the question of that property’s value.

For a more detailed description of these proceedings, please see the longer article on our website.